Macroeconomic events in one country can have a ripple effect on the international financial environment, affecting borrowing costs, cross-border deals, and profit opportunities. A country’s debt solvency can also impact the value of its debt and trigger a sell-off. An attractive international financial environment is characterized by investment and economic growth, leading to infrastructure development and job creation. Market contagion can occur when the behavioral influence of a market negatively impacts international activity.
Sometimes macroeconomic events occur that cause a ripple effect throughout the international financial environment. Even if a condition or event develops in a single country, the influence of that country’s economy has the potential to move markets around the world. This could be due to the fact that other countries are creditors of the nation where a positive or negative event has occurred or is likely to unfold. The influence of a large global economy or emerging market has the potential to cause a stir in the financial environment, which could affect borrowing costs, cross-border deals, and profit opportunities.
An international financial environment represents the conditions for activity in the economy or in financial markets around the world. It may be influenced by something important, such as a country’s debt solvency. Governments, corporations and other investors around the world participate in buying other nations’ debt as profit opportunities arise. A downgrade of a country’s debt by a rating agency could damage the value of that country’s debt and suggest that a default may be imminent. These conditions have the potential to trigger a sell-off, which is when there are more sellers than buyers of risky debt in the markets.
Just as an international financial environment can be influenced in a negative way, it can also be affected in a positive way. An attractive international financial environment is one in which investment and economic growth are mature or already occurring. When an economy is growing, it leads to more infrastructure development and often more jobs available. Subsequently, international investors may recognize an opportunity to allocate capital to these growth initiatives in an attempt to turn a profit, while corporations may develop partnerships or create new locations in foreign markets. All this activity is likely to create a good financial environment.
It is not unusual for the international financial environment surrounding stock markets around the world to be the result of one country responding to another. With all the various time zones around the world, trading sessions occur at different periods of the day globally. When a country’s stock market is under extreme selling pressure during the session, this sentiment has the potential to impact the direction of trading in another country when that market begins trading. This can be called market contagion when the behavioral influence of a market negatively impacts international activity.
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